Thursday, 30 May 2013

Job Guarantee buffer stock nonsense - Part 2.

Continuing where I left off here, let’s now consider why JG reduces unemployment. Incidentally, if you find the arguments and ideas below hard going, don’t worry: as far as I know there is no economist on planet Earth who has any sort of grasp of these ideas. Though a possible exception is Malcolm Sawyer.

As mentioned in Part I, there is crude but nevertheless theoretically interesting way of abolishing unemployment. It’s to tell the unemployed their unemployment benefit is conditional on their walking up and down their street keeping it free of litter. And those refusing that work are deemed to have turned down a job, and are thus not counted as unemployed: so unemployment vanishes.

With a view to making that unemployment abolishing system more efficient, let’s first consider whether the subsidised jobs (JG) should be on what might be called “specially set up” schemes or employers like the Work Project Administration in the US in the 1930s or the “Job Creation Scheme” set up in the UK in the 1970s. The Alaternative is to allocate JG people to EXISTING employers.

Existing versus specially set up employers.

The reason specially set up employers don’t make much sense is quite simple, and is as follows.

The productivity of the above hypothetical street cleaners could obviously be improved by giving them a bigger variety of jobs and having them work with more materials, capital equipment and permanent skilled supervisory labour (which I’ll refer to as “other factors of production” (OFP). But there is a problem there, as follows.

As demand is raised, inflation kicks in in a serious way. The point at which it kicks in is given various names. I’ll use a popular one: NAIRU.

Now there is not much point in JG when unemployment is above NAIRU since employment can be raised simply by raising demand. I.e. JG really comes into its own at NAIRU.

But at NAIRU, a JG system cannot just order up oodles of OFP for JG people to work with: that OFP can only come from the existing or regular economy, the latter is (by assumption at capacity, or NAIRU).

So do we set up a JG scheme consisting of specially set up employers which employs virtually no OFP? Because if so, output would be ridiculously low. Plus one would then have two sets of employers, performing very similar tasks in some cases, with one set being efficient and the other being ridiculously INEFFICIENT.

Much better is to let EXISTING EMPLOYERS take on JG people. That way, those JG people are working alongside relatively normal levels of OFP, thus their output will be reasonable.

Why does “street cleaning” reduce unemployment?

It might seem that the above crude street cleaning solution to unemployment works because the relevant output (street cleaning) is given away rather than sold: i.e. no additional demand is required to bring the jobs into being. And demand is the big constraint on raising employment: it can cause excess inflation.

But, as pointed out in Part I, we’ve had an ASTRONOMIC INCREASE in the proportion of GDP “given away” over the last 150 years (i.e. a big increase in the public sector) and unemployment has not fallen in consequence. So the “give away” point is clearly defective.

Now the defect lies in that word “inflation”: excess inflation does not occur simply because demand rises. Inflation occurs when aggregate demand is excessive RELATIVE TO aggregate supply, labour supply in particular. And if the above crude “litter clearing” solution to unemployment were implemented, the reason it works would SEEM TO BE, first that the output is given away, so no extra demand is needed. Second, there is no reduction in labour supply to the regular jobs market. That is, those engaged in litter clearing have just as much incentive to seek regular jobs as when unemployed. Indeed, they arguably have MORE INCENTIVE.

But there’s actually yet another condition that has to be fulfilled for the system to work, and as follows.

Extra output must come JUST FROM JG people.

The cost of JG employees to the employer needs to be such that ALL EXTRA OUTPUT stemming from the JG system comes from employers hiring JG people rather than from their hiring more JG people plus more OFP. Remember: employing more OFP is not allowed.

So the price of JG labour has to be such that employers are induced to expand output PURELY BY taking on JG people. So, just to keep it simple, JG people really need to be allocated to employers for free.

But note that if the latter objective is attained (having extra output come from JUST JG people rather than JG people plus more OFP), that makes allocating JG people to PRIVATE SECTOR employers just as inflation free as allocating them to PUBLIC SECTOR employers. That is, if demand is raised, and private sector employers are induced NOT TO raise their demand for OFP, but to bring about an increase in production PURELY BY hiring JG people, then no extra inflation will ensue.

Put another way, the basic cause of excess inflation is excess demand for OFP BOTH FROM public and private sectors. But if that excess demand can be avoided (in either sector), then there is no reason not to extend JG to the private sector, as indeed has been done in the case of the UK’s Work Programme and other similar schemes in Europe over recent decades.

To summarise, the idea that JG works because it concentrates on “give away” activities is actually nonsense. The reason it works is rather that (if properly structured) it induces employers to get extra output JUST FROM JG people – not from permanent skilled people, and second, JG people have the same incentive to seek regular work as when unemployed.

Further arguments for private sector JG.

1. The private sector is better at employing relatively unskilled labour than the public sector, i.e. average skill levels are higher in the public sector.

2. In that the purpose of JG is to maintain skills, the bigger the VARIETY of employers and jobs to which to allocate JG labour the better.

3. The empirical evidence is that post subsidised employment record of those who have done subsidised private sector jobs is better than those who have done subsidised public sector jobs.


  1. One problem that I see is this system creates an incentive for employers to hire JG workers instead of workers they would normally have paid to hire. Maybe this a minor problem but we had a system like this in the 80s in Canada. The program was called Job Sharing and employers could hire the JS people at a fraction of regular wages. The hours of regular employees were reduced to facilitate the JS hiring. The program did give people much needed work experience.

    1. Hi John,

      Very good point. I should have said something about that. I've got an answer for that which is basically that if JG people stay with a given employer for a relatively short period, employers won't use them to displace permanent / key staff with firm specific skills. But I need to say more about that. So Part III will appear in a few days. Thanks for your interest.


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